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How Long Until We Reach Full Employment?

Suppose that we use the last two recessions to forecast how long it will take to return to full employment. One quick, back of the envelope method to produce these forecasts is to calculate the average rate of recovery per month for the last two recoveries, and then apply it to the current recession. The rate of recovery from the peak unemployment rate of 7.8% in June of 1992 through the trough of 3.8% in April of 2000 was, on average, a -0.04255 change in unemployment per month. From the peak of 6.3% in June of 2003 through the trough in 4.4% in October of 2006, the average rate of change per month was -0.04750.

Averaged over both periods, the rate of decline was -0.04403 per month. This is the rate used to construct the forecasts shown by the dotted red lines in the figure. (Both the in-sample and out-of-sample forecasts are shown. The out-of sample forecast begins at the peak of 10.1% in November of 2009 to be consistent with the way the rates of change are constructed.):

The resulting forecast is truly scary. Here are some benchmarks:

7% unemployment in August of 2015
6% unemployment in June of 2017
5% unemployment in May of 2019
4% unemployment in April of 2021
Thus, if we recover at the same pace as in the last two recessions, something we certainly can't rule out, it will take more than six years to get to 6% unemployment rate, and until June of 2018 to get to 5.5%, my best guess of the long-run natural rate of unemployment.

Things may be looking up, and we may do a bit better than this -- I certainly hope that we do. But we have a long way to go, and it's too soon to turn our backs on the unemployed.

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